Charlie Langdale Opinion - 20/September/2022

What voluntary carbon markets need to do next

A large, mature voluntary carbon market is urgently needed. To get there, it has some growing up to do, says Charlie Langdale, from international insurance broker Howden

The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy


In the absence of regulation, insurance has a big role to play in boosting investor confidence in the voluntary carbon market

McKinsey’s estimate that the voluntary carbon markets could grow fifteen-fold to $50 billion in the period 2020-2030 seems an astronomical ask. But it does need to happen if we are to limit global warming to 1.5°C by 2050.

To get there, businesses of all sizes and stripes need to get behind the voluntary market. The demand is there but the buy-side remains a little tentative. This is uncertain territory for most and the need for regulation is obvious.

Past lessons can offer some solace that the necessary changes are possible.

In 1911, investing in stocks and shares was fast becoming America’s national sport. So Kansas introduced state laws intended to protect investors from worthless securities. Basic disclosure laws required documentation to explain the interest an investor could expect and why. It was not perfect, as an issuer could still sell a security with unfair terms, as long as they were open about what the terms were.

For unscrupulous characters committed to finding them, there were ways around the law. But investing was for the rich, people with pockets deep enough to suffer a few bad choices. Fraud was simply another risk. This was well known—and enough to deter the casual first-time investor.

The situation in early 20th Century Kansas has several parallels with the voluntary carbon markets today.

Some excellent carbon businesses and projects exist, but unfortunately, there are also people selling carbon credits that are not worth the paper they are written on. Often, the price of the credit bears no relation to the carbon-sequestering capabilities of the underlying project. So although there are plenty of investors with an appetite, the number of high-quality securities needs to grow to meet the latent demand.

The state laws in Kansas eventually evolved into the regulation of the US stock market, which ushered in an era of increased transparency—this is exactly what the voluntary carbon market needs in order to grow up into a $50 billion market.



The vital role of insurance, today and in future

A strong example of a well-performing regulated carbon market comes from another former frontier state. The California Cap and Trade Scheme has been successful in its initial goal to drive emissions to pre-1990 levels by 2020, in fact, it achieved this four years early. As it stands, California is ahead of its target to reach net zero by 2045.

At around $150 million, California Cap and Trade is a small carbon market but a progressive one. It redistributes profits to other emission-reducing schemes and affected communities. It is a strong example of how a fully functioning, regulated carbon market should work, and the industry can learn some lessons from this.

Cap and trade has a progressive attitude towards using insurance. It was the first market to seek out carbon credit invalidation coverage, locking in the value of millions of carbon credits.

The credits are indemnified against fraud and negligence, and various other factors that can devalue the asset. If issues arise and the carbon credits being produced do not sequester the correct amount of carbon dioxide, the policyholders could rectify their carbon position.

This helps create confidence in the efficacy of the scheme and of carbon offsetting as a whole, which is exactly what is needed to grow the voluntary markets.

As offsetting becomes mainstream, there will be many companies staking their reputation on their net-zero credentials.

There are plenty of companies that have publicly stated a goal to become a net-zero operation. Offsetting will be a necessary part of that. If the credits were to be invalidated during an audit, it would serve to undermine the entire net-zero strategy. Negative press and reputational damage would inevitably follow.

The stakes are high for businesses. Soon carbon credits will become completely embedded into the way things are done. Making them accessible and trusted by the masses is an essential part of the big-picture goal.

If the goal is to get as many quality projects funded and en route to full carbon-capturing maturity as soon as possible, the insurance industry needs to step up.

Until regulation comes, the ability to insure voluntary carbon offsets is an important driving force towards reliability and quality. When securities are insured, insurance gives people confidence in that security which, in turn, supports confidence and liquidity in the market. Ultimately, it will increase the availability of much-needed capital to be channelled into high-quality carbon projects on the ground.

As well as providing a useful balance sheet to lean on, insurance companies bring expertise in risk management and due diligence. Their increasing involvement in the voluntary market will raise standards, smooth the transition to the regulated environment and help take the bumps out of the rocky road to net zero. •


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